Over land, under sea, and through the air, a fierce battle continues to rage to shave each extra millisecond off trading speeds.

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This fight was first centred on custom-built fibre-optic cables, which could quickly relay trading messages from firms’ servers to exchange data centres. Next, came microwaves. Now, a variant on microwave technology known as millimetre-wave transmissions is in use, and point-to-point laser links are also under development.

These technologies are pricey to build. Spread Networks, a US technology provider, spent an estimated $350 million building a fibre-optic route between Chicago and New York in 2011.

But for high-frequency trading firms, which use computer-driven techniques to trade across different markets in fractions of a second, using high-speed links is a key part of the “race to zero”. This is the contest to eliminate time delays, or latency, in their systems and be the first to grab a trading opportunity (see below).

HFTs have grown to such an extent that they now account for up to a third of activity on European exchanges and have become a lucrative client base for these exchanges and technology providers alike.
Three or four years ago, many HFT firms would have sought to gain an edge over rivals by building low-latency networks themselves. But the pace of technological change and the cost of investments has become such that specialist providers are increasingly coming to the fore.

Nowhere is this more evident than in microwave routes. Microwave links have been around for decades – the BT Tower, opened in 1962, was regarded as a fancy rig on which to hang microwave dishes – but almost died out as fibre-optic cables allowed for vastly higher capacity. But in terms of the raw speed in getting data from A to B, microwaves have an edge and are growing in use in the financial services sector.

Stephane Tyc, a co-founder of McKay Brothers, a US firm which operates one of the fastest microwave networks between Chicago and New York, said: “We are definitely on a path of global acceptance in terms of microwave-carried data. Only a small proportion of firms use microwave data currently, typically HFTs. Some smaller, latency-sensitive desks in the big banks might consume it, but as a whole it is under-utilised as it takes time to adapt systems. But everyone is going to adopt. It’s a question of the pace of adoption, rather than if it is going to be adopted.”

Many of the world’s most important trading routes – including London to Frankfurt and New York to Chicago – are now well served by microwave networks, but opportunities remain to refine these links.

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Olav van Doorn, chief executive of Custom Connect, a Netherlands-based connectivity provider which built one of the first microwave lines between Basildon, to the east of London, where NYSE Liffe has a giant data centre, and Frankfurt, said: “Microwave technology is already in use between some of Europe’s major financial exchanges… although there is still no seamless network that integrates them all.”

Faster networks

Microwave networks allow data to travel through the air and are therefore much faster than fibre-optic cables. Van Doorn said: “From a latency point of view, the technology is proven. Latency reductions of at least 40% are possible when compared to traditional fibre services.”

But microwaves, unlike the waves used for radios or mobile phones, travel in straight lines so they must be beamed between an array of fixed dishes mounted in high places, typically on rooftops or tall gantries. This means that bodies of water, mountain ranges and the weather are all significant obstacles.

Microwaves must be relayed from buildings higher than 100 metres, according to Tyc, so securing tower space is key. That means securing a building permit and fighting off other providers. According to Hugh Cumberland, a solution manager at connectivity provider Colt, “tower squatting” is rife, whereby providers take space to prevent others from using it.

Tyc added: “If one tower fails or you cannot secure a building permit, there is a ripple effect, you might have to redesign three or four fixed sites around it.”

McKay Brothers’ Chicago to New York network uses about 20 fixed microwave dishes, and the company is expanding into Europe.

The problem here is not only the English Channel, but the challenges of operating across multiple countries and jurisdictions. The high frequencies at which microwaves send data are licensed by the regulator and are increasingly in short supply.

Van Doorn said: “Creating a link between the UK and mainland Europe itself is problematic and supporting the network in four different countries adds to the complexity. Obtaining frequencies and roof rights throughout the various countries is complicated for providers that do not understand local legislations and procedures set by each individual country’s [telecoms] authorities.”

Nevertheless there are opportunities for greater adoption of microwave communications in the region, both around major trading hubs and into emerging markets.

The London Stock Exchange Group is partnering with NexxCom to build a millimetre-wave network from its City of London-based data centre to the so-called LD4 centre in Slough, to the west of London. The centre hosts data for Bats Chi-X Europe, Turquoise, Icap’s electronic platforms and several bank-owned dark pools.

Van Doorn said: “There are great opportunities to expand further into Europe like new routes into the Nordics, eastern Europe in general and further expansion within metropolitan areas. All these are currently being evaluated and built.”

Military lasers could also come to these shores soon. Next month, Anova Technologies, a US communications company, plans to switch on laser devices linking data centres in New York, according to The Wall Street Journal last week. This technology can be traced back to the 1990s, when scientists gathered images from outer space that corrected for atmospheric distortions, and uses telescopes with flexible mirrors that can adjust thousands of times a second.

However, all providers agree the next major step would be a microwave link across the Atlantic. Possible solutions to help relay microwaves across such a large body of water include industrial balloons, planes and ships.

But Tyc warned: “It’s hard to say that it’s impossible. We are researching it but we are not close to any kind of solution.”

Jock Percy, chief executive of Perseus Telecom, said: “The biggest challenge to an Atlantic link is the capital cost. With volatility relatively low, there is an not enormous desire to do anything new on a transatlantic basis because the profitability among HFT firms just isn’t there. There are other easier opportunities globally.”

However, van Doorn said: “The end users that make use of low-latency networks can be profiled as typical ‘followers’. Once one organisation decides on a new network/route, the rest will follow. Whether they like it or not, this is still a race to zero and microwave is an essential tool for winning the race.”

• Going faster than light – without a hyperdrive

So what time difference are we talking about?

Sending a trading instruction from London to Frankfurt would take about eight milliseconds (eight thousandths of a second) by fibre-optic cable and four milliseconds by microwave. For a high-frequency trader, this could mean the difference between a profitable and a loss-making strategy.

Fibre-optic cables use lasers to send data at the speed of light. How can microwaves be faster?

Light slows down as it passes through things and the glass in fibre-optic cables is relatively dense so it travels at only about two-thirds of its normal speed. Microwaves are passing through air, which is much less dense, so the signal travels faster.

Are microwaves reliable and safe? Will they cook birds that fly through the beam?

The beam is narrowly focused and any effect on birdlife is infinitesimal. However, workers who install the equipment are told not to stand in front of the beam for extended periods.

What’s the difference between millimetre-wave links and microwave?

By millimetre-waves, we mean the range of radio frequencies between about 30 and 300 gigahertz. Microwave frequencies are between around one and 30 gigahertz. The higher frequency of millimetre waves gives them a wider range of possible uses.

What happens if it rains?

While faster than fibre-optic cable, microwave and milliwave systems are susceptible to rain, wind, solar activity and even flocks of birds, which can disrupt signals. Rain fade is the term which describes the absorption of microwave radio frequencies signals by atmospheric rain.

Where do lasers fit in?

Lasers are less affected by weather, in part because the lasers can detect atmospheric conditions and adjust their beam to compensate. It’s also easier to find sites to hang them.

Is there any other technology that could be faster still?

All forms of electro-magnetic radiation, including military lasers, radio waves, infrared radiation, visible light, ultraviolet radiation, x-rays and gamma rays are under consideration because they all go faster through the air than they do through glass. |It’s all about finding something
commercially viable that gives a speed advantage.